Consumer Price Index Accelerated in May

In May, the Consumer Price Index (CPI) rose by 3.2 per cent year-over-year (y/y). This was higher than April’s 2.8 per cent increase.

Key insights

Higher gasoline prices pushed the CPI higher again in May. With the cost of a barrel of oil averaging a little more than $100 per barrel during the month, the acceleration in inflation comes as little surprise. With jet fuel also affected by the energy price spike, air transportation prices also increased by 7.4 per cent (y/y). However, declining shelter costs in Canada helped to partially offset some of this upward pressure. Both rent and mortgage interest costs continued to decelerate, as the effects of weaker population growth and past interest rate cuts unfold.

The near-term inflation outlook hinges on global energy markets. In turn, the prospects for global energy markets hinge on whether Iran and the United States can agree to an enduring peace which is required to normalize oil and gas flows. Oil prices have fallen over the last two weeks following news of movement toward a deal. This will translate into cooler prices at the pump for Canadians and less upward pressure on the CPI in the latter half of June, at least. However, some upward pressure on other goods is likely in store, regardless of any deal. Suppliers of many goods, particularly fresh food, have faced higher transportation costs and will pass a share of this burden to consumers.

Much could happen over the next few weeks, but we expect the Bank of Canada will hold its policy rate steady on July 15. In May, the CPI pushed just above the Bank’s control range of 1 to 3 per cent, which could potentially call for a rate hike to tamp down inflation. However, the source of the acceleration is well understood; namely, the conflict in the Middle East. If an enduring peace deal is reached, the price of oil should gradually cool, bringing inflation down with it. Waning demand, a symptom of a weak economic outlook, is also limiting the ability of businesses to pass on higher costs to consumers. Indicative of this, core inflation is much cooler—at around 2.1 per cent, according to the Bank’s preferred measures. The CPI excluding food and energy, another measure of core inflation, grew by only 1.6 per cent in May. While the Bank of Canada aims to keep the headline CPI figure around 2 per cent, it will look to these core measures when assessing the likely path of future inflation. From this standpoint, there is room to hold rates steady in July and wait to see how sharply energy prices fall, how shaken Canadians’ inflation expectations have become, and whether higher fuel prices are contributing to broader price growth.

For more details about the impact of the shifting geopolitical landscape and our research on Canada’s place in a changing world, please read more here.